Does a self-employed worker have to be pension auto-enrolled?
Data from the Office for National Statistics shows that there are over four million self-employed workers in the UK. Worryingly, only 22 per cent of them contributed to a pension scheme in 2012-13.
Those who are self-employed and deemed ’workers’ (it is possible to be both self-employed for tax purposes and worker under employment law) have rights under auto- enrolment. In many cases employers are forgetting to examine their contractor or self- employed pool to check the requirements.
Who should employers auto-enroll?
The first step for an employer looking at its auto-enrolment obligations is to identify all workers as they only have auto-enrolment duties in respect of certain categories of workers, which include an individual who has entered into, or works under:
• A contract of employment
• Another contract by which they undertake work or perform services personally.
How do employers identify workers?
Often it will be easy to work out whether someone is a worker, as they will have an employment contract, but the distinction between a ‘contract for services’ and a ‘contract of service’ has been widely debated in employment law. Employers should note they cannot rely solely on a person’s tax status when assessing whether or not they are a worker.
An individual considered by HMRC as self-employed for tax purposes may still be classed as a worker under pension legislation, if they are in fact working under a personal contract of services. In cases where there is uncertainty, an employer will need to examine the individuals contract to establish whether or not they have worker status.
What tests should employers consider?
Consultants (including those contracted through their own personal service company) can be considered workers under the PA 2008 and are therefore potentially covered by the auto-enrolment regime.
It should be noted that the definition of ‘worker’ is to lower the ‘pass mark’, to that of an employee. So where an individual is on balance, a self-employed contractor but there are some factors which point towards employment, it may be possible for them to qualify as a worker.
No single factor is conclusive in determining whether an individual is a worker or indeed for that matter self-employed. Under employment law, it is the true nature of the relationship between the individual and their employer which determines the individual’s status.
The following areas should therefore be considered:
• Personal service: Does the individual undertake the contract to personally perform work or services? If so, this points towards worker status. The same will apply even where the contract contains a substitution clause, if the parties never in reality intended that clause to be exercised. That said in Bacica v Muir (2006) industrial relations law report 35 the employment appeal tribunal (EAT) emphasised that a worker status cannot be determined alone by a requirement to provide personal service.
• Business undertaking: The EAT has noted that ‘carrying on a business undertaking’ has a very wide meaning. In one sense, every self-employed person ‘carries on a business undertaking’. However, such an interpretation could not have been intended. The intention behind the definition of a worker was to create an intermediate class of protected workers. Therefore the test to determine whether the individual was ’carrying on a business undertaking’ and whether the ‘engager’ was a customer of that business was similar to the test to determine whether a contract was a contract of service or a contract for services. Self-employed individuals often have to ’call in’ when they are off sick, attend team meetings and may even have a desk or equipment - all factors which suggest worker status.
• Mutuality of obligation: Is there mutuality of obligation? This is considered an essential element for the individual to fall within the category of worker.
Case law has tended to find that individuals such as salesmen and labourers have been found to be workers, even where they had a limited right to send someone else to work in their place.
The position of each self-employed worker needs to be assessed, and monitored on an ongoing basis, to determine whether they are in fact an employee, a worker or genuinely outside of auto-enrolment.
The Pensions Regulator provides some guidance in the booklet Employer duties and defining the workforce (April 2014 version).
What steps should employers take?
• Identify their workers by reviewing their self-employed individuals
• Consider which workers would also be jobholders (aged between 16-74 and earning at least £5,772 in 2014-15)
• Assess what earnings are for pension’s purposes for example salary, commission, bonuses, overtime etc
• Comply with the auto-enrolment requirements and notifications
• Consider if using postponement for three months will assist
• Monitor the earnings of workers for any changes
• Keep records of the decisions made and about workers who join the pension scheme for at least six years.
Susan Ball is partner at Crowe Clark Whitehill LLP and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards. Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.
Does a self-employed worker have to be pension auto-enrolled?
Data from the Office for National Statistics shows that there are over four million self-employed workers in the UK. Worryingly, only 22 per cent of them contributed to a pension scheme in 2012-13.
Those who are self-employed and deemed ’workers’ (it is possible to be both self-employed for tax purposes and worker under employment law) have rights under auto- enrolment. In many cases employers are forgetting to examine their contractor or self- employed pool to check the requirements.
Who should employers auto-enroll?
The first step for an employer looking at its auto-enrolment obligations is to identify all workers as they only have auto-enrolment duties in respect of certain categories of workers, which include an individual who has entered into, or works under:
• A contract of employment
• Another contract by which they undertake work or perform services personally.
How do employers identify workers?
Often it will be easy to work out whether someone is a worker, as they will have an employment contract, but the distinction between a ‘contract for services’ and a ‘contract of service’ has been widely debated in employment law. Employers should note they cannot rely solely on a person’s tax status when assessing whether or not they are a worker.
An individual considered by HMRC as self-employed for tax purposes may still be classed as a worker under pension legislation, if they are in fact working under a personal contract of services. In cases where there is uncertainty, an employer will need to examine the individuals contract to establish whether or not they have worker status.
What tests should employers consider?
Consultants (including those contracted through their own personal service company) can be considered workers under the PA 2008 and are therefore potentially covered by the auto-enrolment regime.
It should be noted that the definition of ‘worker’ is to lower the ‘pass mark’, to that of an employee. So where an individual is on balance, a self-employed contractor but there are some factors which point towards employment, it may be possible for them to qualify as a worker.
No single factor is conclusive in determining whether an individual is a worker or indeed for that matter self-employed. Under employment law, it is the true nature of the relationship between the individual and their employer which determines the individual’s status.
The following areas should therefore be considered:
• Personal service: Does the individual undertake the contract to personally perform work or services? If so, this points towards worker status. The same will apply even where the contract contains a substitution clause, if the parties never in reality intended that clause to be exercised. That said in Bacica v Muir (2006) industrial relations law report 35 the employment appeal tribunal (EAT) emphasised that a worker status cannot be determined alone by a requirement to provide personal service.
• Business undertaking: The EAT has noted that ‘carrying on a business undertaking’ has a very wide meaning. In one sense, every self-employed person ‘carries on a business undertaking’. However, such an interpretation could not have been intended. The intention behind the definition of a worker was to create an intermediate class of protected workers. Therefore the test to determine whether the individual was ’carrying on a business undertaking’ and whether the ‘engager’ was a customer of that business was similar to the test to determine whether a contract was a contract of service or a contract for services. Self-employed individuals often have to ’call in’ when they are off sick, attend team meetings and may even have a desk or equipment - all factors which suggest worker status.
• Mutuality of obligation: Is there mutuality of obligation? This is considered an essential element for the individual to fall within the category of worker.
Case law has tended to find that individuals such as salesmen and labourers have been found to be workers, even where they had a limited right to send someone else to work in their place.
The position of each self-employed worker needs to be assessed, and monitored on an ongoing basis, to determine whether they are in fact an employee, a worker or genuinely outside of auto-enrolment.
The Pensions Regulator provides some guidance in the booklet Employer duties and defining the workforce (April 2014 version).
What steps should employers take?
• Identify their workers by reviewing their self-employed individuals
• Consider which workers would also be jobholders (aged between 16-74 and earning at least £5,772 in 2014-15)
• Assess what earnings are for pension’s purposes for example salary, commission, bonuses, overtime etc
• Comply with the auto-enrolment requirements and notifications
• Consider if using postponement for three months will assist
• Monitor the earnings of workers for any changes
• Keep records of the decisions made and about workers who join the pension scheme for at least six years.
Susan Ball is partner at Crowe Clark Whitehill LLP and heads up its Employers Advisory Group. She has more than 30 years’ experience focusing on UK and overseas employment tax, social security, investigations and rewards. Susan also sits on the Council of the Chartered Institute of Taxation (CIOT) as well as on its Employment Taxes sub-committee.
